What does the rise of the discounters tell us?

Today we published a sequel to the report we wrote last month on the rise of the discounters versus the ‘big four’ supermarkets but this time we included all the major convenience stores including those of the supermarkets – so in a nutshell the full range of the grocery market. The headline results you may have seen in the Financial Times or heard on the BBC or indeed elsewhere as they make interesting reading!

The top line is that the discounters 5 year annualised growth rate has overtaken that of not only the supermarkets but also the convenience stores. Now whilst I have tracked the rise of the discounters over quite a few years I myself was quite surprised when we ran the numbers as my gut feeling was that convenience stores would be ahead, albeit just. How wrong I was as they come second with a 5 year CAGR of 7.6%, the supermarkets at 6.0% and the discounters (Lidl, Aldi, Poundland, B&M Bargains, Iceland, 99p stores etc) at a significant 8.2%.

The report last month looked at which of the big four supermarkets was most impacted by having above average numbers of discounters around them and Morrison’s was clear winner at 49% of stores having that predicament. So why is this latest data of even greater significance? Well for me there are four key takeaways from the report (a summary can be downloaded from http://www.localdatacompany.com/reports)

Four Key Takeaways

1. The ‘grocery’ market has a relatively new, fiercely competitive and highly expansive group of challengers for existing spend. We have already seen the race to the bottom on prices but this is more than about price and it is more than a distressed consumer in a recessionary economy.

2. The big four have continued to open supermarkets albeit at a slower rate than in the past whilst at the same time also opened or acquired convenience stores. This in itself is challenging when you have so many and a consumer can only shop in one or the other (or indeed online – lets not forget Ocado!) The image below from LDC’s online dashboard shows Ipswich and the 133 supermarket, grocery and food shops it has – are they all profitable and sustainable in 2015 and beyond?

3. There is often a perception that if the big multiples are doing well then the independents must be being crucified as their customers go to the big chains. If this is your view then I am afraid you are wrong as the report shows that independent convenience stores have continued to grow and held a 5 year CAGR of 5.3%. In 2015 alone we have seen 141 new independent convenience stores open.

4. How much longer can this be sustained as whilst there has been growth, this growth has slowed significantly since the peaks of 2011/12? That said if we look at 2015 to date then the discounters have grown by 5.6%, convenience stores by 4.0% and supermarkets by 2.2%. The point here is that in 200 towns (of the 1,319 analysed), we have seen convenience stores close to the tune of -274. Edinburgh, for example, has seen its number drop from 110 in 2014 to 102 in 2015. With the overall continued growth then my guess is that this number of 200 will double each year until a full rebalance of the market has taken place or a major player exits! This is the car crash that I have alluded to in the past and one that Clive Black of Shore Capital calls a high speed motorway crash and he is much better informed than me on the financial implications at stake.

This is the car crash that I have alluded to in the past and one that Clive Black of Shore Capital calls a high speed motorway crash.

So a significant piece of data that we will continue to track as the implications of this ‘car crash’ are significant not just for the operators but also the suppliers. I would encourage you to read the report summary and for LDC clients they have access to the full report and all the associated data which is extensive. I will leave you with Clive Black’s views as a seasoned commentator;

“Analysis from LDC gives us further insight at both a high level and bottom up on a longitudinal basis of the changing character of Britain’s grocery market. What is clear is that there is a very high price being paid for investors in the superstore group’s from not recognising and responding to the evolving industry that LDC so effectively characterises.

To be fair to the management of the majors, no one forecast the collapse of demand in 2009, which led the industry into unheard of territory of multi-year volume contraction against a rising British population. However, it is also clear that well into that demand gap the same majors kept opening too much space and kept ignoring the reality of the discount channel. Additionally, few have recognised the structural importance of rising calorific intake outside the home, which augments the retail challenges; food-to-go perhaps being the fastest element of the convenience segment.

Matthew Hopkinson writes of a car crash for superstore operators. We’d call it a high impact motorway smash when measured in terms of earnings, with the superstore vehicles now in the garage, assessments undertaken and repair underway. That repair require a major conservation of capital, so the virtual abandonment of superstore openings, a store-by-store re-assessment of space utilisation and, perhaps most important of all, the fundamental re-appraisal of the offer, focusing particularly on narrowing the discounter price differential (at huge cost) and starting to try and sell from a position of greater price confidence the virtues of the superstore and hypermarket.

Shore Capital believes that the superstore reset has just started but represents a more stable future for the format. Additionally, partial normalisation in shopping behaviour may lead to a slow down in the rate of momentum that convenience and discount has enjoyed; could we talk about convenience and discount peaking out in 2015/16 in future years? Whatever the outcome, the superstores’ battle for survival will be good for shoppers.”

Our finale will be to look at how the ratio of people to ‘grocery’ stores varies around the country as in pure convenience store numbers then the variance is as much as 199 people per store in Inveraray (Scotland) to nearly 15,000 per store in Weybridge! Which towns have the most or least ‘grocery’ outlets? Watch this space……..